Uncovering the best Canadian penny stocks to buy now is difficult but not impossible. Learn what to look for now in this article

Penny stocks can be riskier than other investments and early success can (paradoxically) actually lead to a big loss.

The best Canadian penny stocks to buy now have appeal for some aggressive investors who aim to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.

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Consider the industry when looking for the best Canadian penny stocks to buy now so you can accurately assess risk

When investing in penny stocks, in addition to looking at the company fundamentals (including the members of management teams, strong balance sheets and so on), it’s also important to take a look at industry-specific considerations that most often appear in technology, mining and software development because that’s where Canadian penny stocks are often found.

In the technology or software development sectors, it’s often hard for a start-up to compete with a well-established firm with far more capital and a healthy cash flow.

Junior tech companies, even when they have an intriguing business concept or a saleable product often don’t have the well-trained staff, established sales networks and media connections or other business assets that established tech companies have at their disposal. These networks can take years to establish. Even after an initial sales and earning burst, it may be hard for them to continue the momentum—and they may never reach the critical mass required to achieve consistent profitability. As with all stocks, look for junior tech companies with good fundamentals if you want to get in on the ground floor of such an investment.

Junior mining stocks also face a unique set of challenges that are not just a result of having to compete with larger firms. Mining companies also need to focus on finding a mine that doesn’t just piggy-back on the popularity of mineral areas that are in the limelight because of a recent rich find. Mining companies need to focus on finding an “anomaly”—a geological marker that may indicate a mineral deposit. A single drill hole offers a 1-in-1,000 chance of turning up such an anomaly, but the odds against finding one are 1,000-to-1. The odds of a single drill hole turning up valuable mineral deposits are about a million-to-1. We would never recommend a penny mine that has all of its value riding on a single drill hole. A series of promising drilling results is a far more encouraging sign of possible success. 

With all stocks, and especially with penny stocks, it’s important to take a careful look at not just the company in which you’re planning to invest, but also what industry it’s in.

Use these eight tips to find the best Canadian penny stocks to buy now

Here are eight of the Successful Investor tips we consider when we analyze penny stocks for aggressive investors.

1. We compare the market cap of the stock with the estimated value of the company’s reserves, future product sales and so on.
2. We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
3. We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.
4. We like to see a strong balance sheet with low debt. Even better, we like to see a major partner who can finance a mine, software and so on to production.
5. We want to see experienced management with proven ability to develop and finance a new business.
6. We look for well-financed penny stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
7. We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.
8. We avoid penny stocks that promote themselves too aggressively (or do so misleadingly). 

Recognize that even the best Canadian penny stocks to buy now entail lots of risk 

Penny stock bubbles have helped investors profit. However, when the bubble bursts, prices of low-quality stocks inevitably come crashing down.

After all, it’s much easier to launch a stock promotion than it is to create a successful, lasting business.

Penny stocks tend to be more speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software. 

Use our three-part Successful Investor approach to build a sound overall portfolio 

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

What experiences have you had with penny stocks that turned into valuable investments?